Ex-TARP Watchdog Unleashes on 'Monster' Banks, Reform Law

The most popular error of our age is the belief that bureaucratic reforms will resolve deep moral and social problems.

If only we tweak the incentives, nudge the right people in the right direction, provide adequate supervision, we can set things right — or so some people think.

When it comes to the financial system at least, this is pure delusion. In the decades following the Great Depression, the policy responses to market upheaval — namely, more regulation — has been proven false. Yet each generation seems doomed to experience that for itself.

In the aftermath of the financial crisis, the country was faced with a choice of what to do with these corporate abominations. Furiously beating back the efforts of reformers who sought to dismantle these monsters once and for all, the Obama administration chose to keep them largely intact. Instead, it sought to control their predatory and dangerous nature through the Dodd-Frank Wall Street Reform Act, a complex set of regulatory shackles that comprised more than 800 pages of legislation and called for hundreds of new regulatory rules. In essence, the administration's approach was to entrust the regulators to build the perfect set of chains to prevent the banks from recreating financial Armageddon.

The administration touts Dodd-Frank legislation (learn more) as proof that it is serious about bank reform (and that Mitt Romney and Paul Ryan aren't). This, however, is nonsense. In fact, the Obama administration's position amounts to shielding the banks from real reform that would dismantle them. (Read more: "Does Dodd-Frank Legislation End Too Big to Fail?")

In Barofsky's words:

As [a recent speech by vice president Joe Biden] makes clear, the Obama administration is not walking away from its protection of the big banks through Dodd-Frank (albeit in a somewhat shackled form), and with Wall Street's campaign dollars pouring into Romney's war chest, a dramatic shift from him seems equally unlikely.

Which makes you wonder: how'd a guy as smart and honest as Barofsky ever get tapped to do oversight on the bailout?